The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road.

By law all credit card companies and lending companies must show the APR to potential borrowers.

The APR is a single comprehensive measure of the cost of credit to the borrower. As such, it must add the points and other fees that a borrower pays upfront to the interest rate that is paid monthly. To do this requires an assumption about how long the mortgage will last. In calculating the APR the assumption is made that the loan runs to term. A 30-year loan will run for the full 30 years, a 15-year loan runs for 15 years, and so on. This minimizes the extent to which upfront fees add to the borrower's cost, since the fees are "stretched out" to the maximum extent possible.

The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.

Another way to understand the APR is that the lender totals up certain specific costs associated with the loan and the interest rate that was quoted to you. Those costs are subtracted from the loan amount you inquired about. That results in a figure lower than your loan amount. Then the payment for your loan is calculated "as if" it were the payment on that lower amount.

As a result, the APR is always higher than the note rate you are quoted. The only exception is when the lender pays for all of your costs, which is often referred to as a "no cost" loan. There really are costs -- the lender is just paying them for you.